NEW YORK — The heat’s getting turned up on the accounting practices of bankrupt companies, and the flames are moving closer to those in the fashion business.

Bankrupt Warnaco Group in its annual report, Form 10-K, filed with the...

NEW YORK — The heat’s getting turned up on the accounting practices of bankrupt companies, and the flames are moving closer to those in the fashion business.

Bankrupt Warnaco Group in its annual report, Form 10-K, filed with the Securities and Exchange Commission on Wednesday, said that it was informed by the SEC staff that they intend to "recommend that the SEC authorize an enforcement action against the company and certain persons who have been employed by or affiliated with the company since prior to Jan. 3, 1999, alleging violations of the federal securities laws." Enforcement actions tend to be civil, not criminal, in nature, and several sources suggested this was the case with Warnaco.

Separately, a Delaware bankruptcy court on Thursday set a trial date in the $500 million litigation between the Montgomery Ward unsecured creditors committee and General Electric Capital Corp., now scheduled for June 2003. The lawsuit details allegations of accounting games played by GE Capital’s management and their effect on the defunct retailer, as well as the granting of stock options. Thursday’s decision came as part of a bankruptcy-court hearing in which the judge, based on votes cast by Ward’s creditors, confirmed the unsecured creditors’ plan to liquidate Ward’s assets, and let the litigation against GE Capital proceed.

As reported, Warnaco’s 10-K named its Designer Holdings Ltd. subsidiary as the source of some of the accounting errors that necessitated a $43 million charge announced in August 2001, along with the restatement of financial results for three years beginning with fiscal 1999. The unit, which held the Calvin Klein jeanswear license, was acquired by Warnaco in September 1997, and Warnaco retains the license.

Speaking of the SEC authorization, Arnold Simon, president of Aris Industries, and president and chief executive officer of Designer Holdings at the time of its acquisition by Warnaco, said: "It couldn’t have anything to do with Designer Holdings. It was a public company and it had as its auditor Coopers & Lybrand. Besides, Warnaco conducted due diligence when it bought the company."

Coopers & Lybrand today is PricewaterhouseCoopers.

According to the SEC filing, the errors involved the recording of inter-company pricing arrangements, the recording of accounts payable primarily related to the purchase of inventory from suppliers and the accrual of certain liabilities. The filing attributed certain of these errors to the company’s European subsidiaries.Both the SEC and Warnaco executives declined comment. Linda Wachner, former Warnaco ceo and current board member, wasn’t available for comment, but her spokesman Howard Rubenstein, of Rubenstein Associates, said: "It is the company that is doing the filing and we have no comment." The filing referred to by Rubenstein is a document called the Wells Submission.

Ira Sorkin, a partner at Carter Ledyard & Milburn and a former deputy chief of the criminal division at the U.S. attorney’s office in Manhattan, explained that a Wells document is "submitted by a potential defendant or respondent in an SEC potential action." He said that those filing such a document earlier receive from the SEC staff information on what violations a possible enforcement action might address.

The document is initially read by the SEC staff, Sorkin said, who will decide whether to proceed with the recommendation that further action be undertaken by the Commission. If the staff chooses to recommend an enforcement action, the Commission then reads the Wells document to determine whether or not it should proceed with the initiation of the action.

Sources said that SEC procedures give Warnaco a few weeks to file the paper work, which under the Commission’s rules must be kept to under 40 pages.

Warnaco, for its part, said in its 10-K that it "does not expect the resolution of this matter as to the company to have a material effect on the company’s financial condition, results of operation or business."

It could not be ascertained at press time which individuals — either former or current executives — might be a party to the SEC enforcement action if one was initiated.

In addition to the SEC, New York State Attorney General Eliot Spitzer is reportedly investigating the legality of stock options and other forms of executive compensation, particularly those granted to executives at bankrupt companies. His office declined comment on the status of the investigation.

Still to be determined is the status of the SEC investigation that is currently ongoing in the Kmart bankruptcy. As reported, that investigation, with the assistance of the Detroit office of the Federal Bureau of Investigation, has been ongoing since the beginning of the year.At Kmart’s launch of the Joe Boxer collection at its Astor Place store in Manhattan on Thursday, James Adamson, the retailer’s chairman and ceo, said that the investigation is being conducted through the stewardship of three committees: trade, finance and equity. "The investigation will take time. The board wants to know what happened and why," he said. Adamson also said that the investigation is an internal one, with the "SEC relying on our own investigation."

As for the Ward matter, the lawsuit involved charges that GE Capital "manipulated Ward’s financial structure" and that creditors were "duped into extending hundreds of millions of dollars in unsecured credits to the debtors. In addition, the lawsuit charged that Jack Welch, former ceo of GE Corp., the parent of finance arm GE Capital, "arranged a GE grant of stock worth $2.5 million to [former Ward’s ceo Roger] Goddu as a quid pro quo for Goddu rejecting J.C. Penney’s offer" of the ceo spot and remaining at Ward’s. Goddu was approached by Penney’s in May 2000.

GE Capital filed its answer in March, denying the charges and seeking to dismiss the lawsuit. Creditors, in addition to the $500 million in damages, also want an order that GE’s $1 billion in claims be subordinated behind the claims of creditors. GE Capital had filed a competing plan of reorganization that would have included the dismissal of the lawsuit, a move that creditors voted down.

As corporate scandals dominated the headlines, the Dow Jones Industrial Average suffered a 229.97 point, or 2.6 percent, setback, ending the day at 8,506.62. The Nasdaq dropped 48.26 points, or 3.6 percent, to 1280.00, but the Standard & Poor’s Retail Index pulled back even further, withering 11.61 points, or 4.1 percent, to end a stormy session at 272.63.

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